- Even in the most optimistic price, Urals will not exceed $ 32 per barrel (on Friday, April 24, Urals was trading at $ 16.39 per barrel in northwestern Europe), while Russia’s oil revenues will fall by 2.5 times compared to 2019 – from $ 124 billion to $ 49 billion. With this option, low oil prices mostly hit the budget, but for oil companies the situation is still comfortable.
- In an intermediate scenario, if demand falls by 11 million barrels. and not all countries comply with the agreement – Urals will drop in price to $ 20–22 per barrel, export revenues will fall four times to $ 30 billion, and new oil projects will be on the verge of profitability. Earlier, Energy Minister Alexander Novak estimated the cost of oil production in old fields in Russia to $ 7 per barrel, and in new fields at $ 15–20 per barrel.
- In the worst-case scenario, producers, despite a large-scale drop in demand, again increase oil production and unleash a war for sales markets. Urals is getting cheaper to $ 13-15 per barrel, oil exports are falling at a record 3 million barrels per day, which forces the company to further reduce production. In this case, Russia’s export earnings will collapse by almost 11 times, to $ 12 billion. The federal budget will lose one third of all revenues in the form of export duties on oil and oil products and most of the mineral extraction tax (6.8 trillion rubles in 2019). New oil projects will begin to operate at a loss, existing ones will be on the verge of profitability.
The scenario of a new oil war of all against all will be a disaster for the market, but so far it seems unlikely, expert from the Skolkovo Energy Center Yekaterina Grushevenko shared her opinion with RBC. It is possible if individual countries do not fulfill the agreement and Saudi Arabia decides to increase production and thus punish the offender, and at the same time the entire market. This happened in March, when Russia refused to further reduce production under the previous OPEC + deal, and Riyadh promised to increase oil supplies by more than 25% and promised discounts to buyers. But this war will again be short, as the oil storage facilities are almost full, Grushevenko concludes. According to her, if this scenario is excluded, the maximum drop in Russia’s GDP in 2020 may not be 13%, but a maximum of 10%.
Oil workers start selling gas at a loss
Why 2020 will be difficult
Despite the decline in production, tough price competition may continue for some time in the world: manufacturers are not ready to lose their share in the collapsed market. Saudi Arabia has not canceled a discount of more than $ 10 per barrel to Brent for Europe. This puts pressure on the price of Urals, which is usually sold at a discount of $ 3-5 per barrel for a basket of light North Sea oils (North Sea Dated also takes into account the price of Brent in the physical market), but at the end of last week it suddenly became more expensive than the standard.
Russia will have to quickly cut production. In May-June, Russian companies will have the largest volumes of reduction compared to March 2020 – 1.8 million barrels. against 1.2 million barrels per day in Saudi Arabia. As a result, in 2020, oil production in Russia will decrease by 45 million tons to 515 million tons (including gas condensate). The state may have to change the existing taxation so that oil companies do not decommission the most efficient fields that do not yet receive tax benefits.
Gas prices at a minimum, increased competition in Russia
The global gas industry has suffered less from the pandemic than the oil industry. The demand for gas is mainly formed by industry, the electric power industry and households, which were not affected as much by quarantines as transport is the main driver of demand for oil and oil products.
Nevertheless, in 2020, gas demand will decline in all markets; in Europe and China, the decline will be 30 billion and 20 billion cubic meters. m respectively. As a result, Gazprom’s exports to Europe could fall by at least 15-30 billion cubic meters. m (in 2019, exports amounted to 193 billion cubic meters). According to the experience of previous crises, in the Russian market gas demand may fall by 5–6% with a fall in GDP by 5–8%, experts at the Skolkovo Energy Center indicate.
Excess gas supply in the market and demand falling due to coronavirus also caused a sharp drop in prices. In Europe, by mid-April 2020, the gas price at the British NBP site broke the psychological mark of $ 2 per million BTUs ($ 70 per 1,000 cubic meters). This is a minimum since 1999 and corresponds to the level of subsidized gas prices in central Russia. In Asia, the cost of gas at the Platts JKM index in April fell to the lowest level ever recorded at $ 2.8 per 1 million BTUs (slightly less than $ 100 per 1,000 cubic meters).
After the end of the epidemic, gas companies may face financing problems, and the most capital-intensive hippo projects may not find money at all if they do not get strong state support, experts say the energy center.
Gas sale in Russia has become more profitable than export
An unusual situation has arisen in Russia because of regulatory peculiarities: domestic gas prices have become higher than export netbacks (the price is abroad after payment of the export duty and transportation costs). On the one hand, this will increase competition for the most profitable consumers in the domestic market, on the other hand, these consumers may begin to demand from the state to lower domestic prices to European prices, the study said.
Energy Rates May Exceed Inflation
The long-term consequences of the crisis for the Russian electric power industry can be very serious, Skolkovo experts write. In contrast to world prices, Russian electricity prices fell slightly due to regulatory peculiarities. Up to 50% of the tariff, industrial consumers pay for the delivery of electricity through the network, as well as for capacity, the price of which is fixed for a period of one year to 20 years, and does not decrease due to a drop in consumption (3-7% in the first half of April). For the population, prices are completely regulated.
Fixing the total payment for electricity amid low consumption may result in higher prices above inflation, experts warned. All large-scale long-term investment programs, which lead to the formation of high fixed payments (the construction of thermal power plants and green power plants under capacity supply agreements, network investment programs, etc.), were planned based on a steady increase in electricity demand and economic growth of 1– 3% per year.
Companies will be forced to cut back on investments, and this threatens lenders and contractors with the loss of investments already made.
To support profits, energy can cut back on repair costs. This is especially dangerous for small heat-supplying organizations, and network accidents can become more frequent in small cities in the winter of 2020–2021.
But one of the main risks for Russian and global energy is non-payment for electricity and heat, experts at the Skolkovo Energy Center point out. All over the world, companies and entire states initiate deferrals of payments, preferential tariffs, and temporarily refuse to disconnect non-payers. But the stability margin of energy companies is not unlimited: for example, European owners of distribution networks will have a shortage of working capital in two to three months due to non-payments, which will lead to a breakdown of short-term obligations in the ordinary course of business, the industry union Energy Community Distribution System Operators warned. Payments to Russian companies for electricity and heat supply could be reduced by 50%, the Council of Energy Producers estimated.
“The global economic recovery after the pandemic also poses additional threats to the Russian fuel and energy complex,” Tatyana Mitrova, director of the Center for Energy at the Skolkovo Business School, told RBC. Increasingly, governments and international organizations are calling for a low-carbon path to stimulate the economy. Thanks to the crisis, the Russian oil and gas sector received every reason to reassess the industry’s prospects and develop a new development model in the context of decarbonization, the expert said.
federal and regional
Source: JHU, federal and regional anti-virus operations